Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/230815
Authors: 
Trimborn, Simon
Härdle, Wolfgang Karl
Year of Publication: 
2020
Series/Report no.: 
IRTG 1792 Discussion Paper No. 2020-009
Abstract: 
The cryptocurrency market is unique on many levels: Very volatile, frequently changing market structure, emerging and vanishing of cryptocurrencies on a daily level. Following its development became a difficult task with the success of cryptocurrencies (CCs) other than Bitcoin. For fiat currency markets, the IMF offers the index SDR and, prior to the EUR, the ECU existed, which was an index representing the development of European currencies. Index providers decide on a fixed number of index constituents which will represent the market segment. It is a challenge to fix a number and develop rules for the constituents in view of the market changes. In the frequently changing CC market, this challenge is even more severe. A method relying on the AIC is proposed to quickly react to market changes and therefore enable us to create an index, referred to as CRIX, for the cryptocurrency market. CRIX is chosen by model selection such that it represents the market well to enable each interested party studying economic questions in this market and to invest into the market. The diversified nature of the CC market makes the inclusion of altcoins in the index product critical to improve tracking performance. We have shown that assigning optimal weights to altcoins helps to reduce the tracking errors of a CC portfolio, despite the fact that their market cap is much smaller relative to Bitcoin. The codes used here are available via www.quantlet.de.
Subjects: 
Index construction
Model selection
Bitcoin
Cryptocurrency
CRIX
Altcoin
JEL: 
C51
C52
G10
Document Type: 
Working Paper

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